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Economists: Ethanol Retains Low-cost Octane Enhancer Status

Ethanol continues to maintain its status as the low-cost octane enhancer, in spite of low oil prices reducing the cost of competing petroleum-based aromatics. The biggest threat, say University of Illinois economists Scott Irwin and Darrel Good, would be a shortfall in U.S. corn production that would cause both corn and ethanol prices to spike. The economists analyzed octane enhancers in the refinery business in a recent FarmDocDaily post, “The Competitive Position of Ethanol as an Octane Enhancer.”

Benzene, toluene, and xylene are petroleum-based aromatic compounds with long histories as octane enhancers in gasoline blends, all with similar octane ratings as ethanol. “Despite the recent increase in ethanol prices relative to gasoline, ethanol prices still remain below that of the aromatics,” Irwin and Good found.

In examining weekly prices of the aromatics and the price of ethanol at the Gulf for two years, January 2013 through January 2015, ethanol was priced under each of the aromatics, with the exception of one brief period in spring 2014. Benzene was the highest priced, but this premium disappeared in early 2015, and now all three aromatics prices are moving together, they write. “CBOB prices were always substantially lower than the price of the aromatics, which is not surprising given the higher production costs of the aromatics compared to other petroleum blendstocks. In general, the aromatics have been priced about 140 to 170 percent above CBOB. It is interesting to note that the aromatic price premium has actually increased in recent months.”

The spread between ethanol and competing aromatics has shrunk, they continue. “The average price of aromatics increased sharply during the first half of 2015, causing the spread between aromatics and ethanol to exceed $1 per gallon. The price of aromatics has since declined below $2 per gallon, but still sits today at 35 cents above the price of ethanol, which has been relatively constant over the past year.”

The economists point out that blending economics for gasoline are rather complicated “due to the differing array of characteristics of alternative blending components and regulatory requirements to produce spec gasoline. For example, ethanol has chemical characteristics that may be beneficial, e.g., as an octane enhancer, or detrimental, e.g., high vapor pressure. Energy companies have developed sophisticated mathematical refinery models to determine optimal blends of the various gasoline components given prices and technical specifications.” Thus, while the direct comparison of the price of ethanol and alternative octane enhancers sheds some light on their relative value, it doesn’t represent all of the factors involved in blending economics.